Governance issues to be highlighted at Rio Tinto AGM

Hermes intends to vote against Chairman due to lack of diversity progress

Joins investor group in calling for further disclosure on climate risks

Ahead of the Rio Tinto AGM tomorrow, Bruce Duguid, Stewardship Director within the Hermes EOS team at Hermes Investment Management, highlights two areas of focus in our engagement with the company.

Environmental risk reporting

The 2017 AGM season marks the first year of new climate change risk reporting requirements for mining companies Anglo American, Glencore and Rio Tinto. This follows the passing of resolutions last year, with the support of more than 95% of shareholders, requesting further disclosure of carbon-risk reporting and the company’s actions to manage them.

Last year’s resolution, which was supported by Rio Tinto’s Board, prompted the company to prepare a special publication on its approach to managing climate change risks, which was published on 10th March. The report includes details of the company’s greenhouse gas reduction targets to 2020, a description of low carbon scenarios considered and a range of low carbon technologies that the company is investing in.

This year, investors from the Institutional Investors Group on Climate Change (IIGCC) are attending the AGMs of the most carbon-exposed UK companies, including Anglo American, Glencore, BP and Royal Dutch Shell, to welcome elements of the new reporting and identify areas for improvement.

Hermes, which is coordinating IIGCC members’ response to the mining company resolutions, welcomes Rio Tinto’s first report. However, it is our view that significantly greater information and disclosure is required by Rio Tinto in future to meet investor expectations.

We welcome the company’s reporting of the low carbon scenarios it considers. However, investors are seeking more tangible disclosure of financial risk, including the company’s estimate of value-at-risk under these scenarios and its strategic response. Further disclosure is needed in order to meet the draft recommendations of the Financial Stability Board’s Taskforce on climate-related financial disclosures.

The company’s refreshed public policy on climate change confirms it is seeking a substantial decarbonisation of the business by 2050. We would now like to see details of the company’s long-term strategy to decarbonise its mining and smelting operations, consistent with the Paris Agreement goal to limit climate change to 2°C or even below. This should include the level of investment in low carbon research and development and for stretching greenhouse gas emissions targets to be included in the executive remuneration scorecard.

Diversity

Diversity is an issue of great importance, and it will be a key area of focus in our voting activity throughout the AGM season. Earlier this year Hermes EOS wrote to the Chairs of Boards of FTSE 350 companies and announced our intention to support the long-term aspiration that company boards, and all levels of management, should reflect the diversity of society across dimensions such as race and gender.

Therefore, we have taken the decision to vote against the re-election of the chairs of the nominations committees of FTSE 100 companies if their boards have fallen significantly short of the target that 25% of directors are women by 2015 and they are unable to demonstrate credible plans to achieve the 2020 target of 33%. Support for these targets was announced by Government in 2010 and while progress has been made at many companies in the years since, others have fallen behind.

Following changes to the board earlier this year, including the appointment of three male non-executive directors, only two out of the 12 Rio Tinto board directors are women, which falls significantly short of the 25% target. Although the company has stated its commitment to diversity and to seeking to ensure better gender balance in future appointments to the board, we believe Rio Tinto must demonstrate a credible plan and a serious commitment to reaching the 33% target by 2020.

Due to the lack of diversity and a credible plan to address this imperative issue, and consistent with our voting policy, Hermes EOS recommends voting against the re-election of Jan du Plessis in his capacity as chair of the nominations committee.

Hermes is a member of the Institutional Investors Group on Climate Change (IIGCC), a network of more than 136 members, including some of the largest pension funds and asset managers in Europe, who represent nearly €18 trillion in assets.